The present invention relates to a computer system for effecting securities trades in general and in particular a computer system wherein separate accounts for a plurality of holders are maintained and trades are aggregated over multiple holders prior to being submitted to a trading system or an exchange.
In a typical retail securities trading operation, a broker holds the funds and securities of a number of account holders (xe2x80x9choldersxe2x80x9d) and maintains data for each account that tracks the balances for the holder""s account and the transactions made by the holder. Examples of such systems can be found at full-service brokerages, discount brokerages and online trading brokerages. These brokerages differ mostly in the manner in which a holder effects a transaction. With a full-service brokerage, a holder might make a trading transaction (a xe2x80x9ctradexe2x80x9d) while on the telephone, and in consultation, with a broker. With a discount brokerage, the holder typically makes his or her own decisions as to trades and calls the discount brokerage with the trade information. With an online brokerage, the holder electronically connects to a computer operated by or for the broker and thus transfers the trade information.
Many existing brokers have several aspects of the above types of brokerage, such that one broker might be a full-service brokerage to some holders or for some trades but be a discount brokerage to other holders or for some trades. However, what is common among each of these brokerages is that they maintain separate accounts for holders. The cash, securities and other instruments owned by a holder at that brokerage are held by the brokerage, often in the name of the brokerage (i.e., xe2x80x9cstreet namexe2x80x9d) and are represented in the data stored about that holder in account files that are part of the data storage of a computer system operated by or for the brokerage.
Another common feature of existing brokerages is that, when a holder enters an order for a transaction, the transaction is executed by the broker in response to the order, depending on the terms of the order. For example, a holder might submit a buy order, a type of trade wherein the holder receives securities in exchange for cash, and the brokerage would submit a buy order on behalf of the brokerage. After the trade is consummated, the brokerage identifies the cost of the security and debits the holder""s cash account accordingly, then updates the holder""s balances to show the purchased securities. This process is known as trade execution.
With the increasing availability of online trading, many holders are demanding faster and faster trade execution. Some online brokerages even offer to waive their commission on a trade if the trade cannot be done within 60 seconds. A growing number of day traders, who buy and sell securities by the hour or minute, rarely holding securities overnight, have been requiring even faster transaction speeds, so that they can take advantage of momentary fluctuations in securities prices.
For many investors, such trading systems are unnecessary, as most financial advisors advise nonprofessional investors to enter and exit the market slowly. Also, for small investors with small amounts to invest, the costs associated with each transaction (commission, etc.) make it difficult to invest using such brokerage systems.
In response to the economics of trading and relative transaction costs, many unsophisticated and small investors place their investments in other vehicles, such as Direct Stock Purchase Plans (xe2x80x9cDSPPsxe2x80x9d) or Dividend Reinvestment Plans (xe2x80x9cDRIPsxe2x80x9d). With a DSPP or DRIP, an investor directly contacts a security issuer (a publicly traded corporation) and makes arrangements with the security issuer to obtain shares in that security issuer, with little or no commission. This benefits the corporation because it results in a wider base of stockholders. In addition, the corporation provides the investor with additional company stock that is purchased with the cash dividends paid by the corporation. Shares are issued either through original issuance or through open market purchases.
Dividend Reinvestment Plans are company sponsored stock plans that enable individuals to purchase shares of stock and/or reinvest dividends in additional shares of company stock for either no fees, or very low fees. The initial purchase of shares must occur through a third party such as a brokerage firm. There are approximately 1,300 DRIP plans available today primarily with Fortune 500 companies.
Direct Stock Purchase Plans are company sponsored stock plans that enable individuals to purchase shares of stock and reinvest dividends in additional company stock, but vary from DRIPs in that DSPPs allow investors to purchase the initial or additional shares directly through the company plan. There are approximately 400 companies that currently offer DSPPs today, primarily large or Fortune 500 companies. A DSPP is often considered a specific form of a DRIP.
First introduced in the mid-1960""s, DRIPs did not gain wide spread popularity until the 1980""s when corporations recognized them as a cost-effective method to raise capital at lower costs while building closer ties with customers by transforming them into shareholders. Today over 7 million individuals in the United States (representing 40 million accounts) employ DRIPs as part of their long-term investment strategies at over 1,300 companies including many large and Fortune 500 corporations.
DRIPs/DSPPs have several advantages over other investment vehicles, but still have disadvantages. For example, the advantages include:
Reasonable Minimum Investment: Investors can enroll in a DRIP with a smaller initial investment relative to full service, discount and online brokerages. For example, many plans only require the purchase of one to 10 shares or a cash investment as low as $50 to $250. Many online and full service brokerage accounts require an initial deposit of $1,000 to $2,500 or more to open an account. Therefore DRIPs offer an advantage to these high initial deposit requirements.
Investments can be made in dollar amounts (or other currency): Many DRIP plans allow investors to purchase stock in dollar amounts rather than in whole shares, enabling investors to purchase or sell fractional shares and budget for regularly scheduled investments. The only way to currently purchase fractional shares through any brokerage (or broker-dealer) is through their dividend reinvestment service, if they offer one, which only permits investors to have their cash dividends reinvested into additional shares. Some brokerage dividend reinvestment services do not allow purchases of fractional shares.
Reasonable Fees: Although many DRIPs require investors to purchase their initial shares from a brokerage firm to enroll in the plan, after enrolled, investors can purchase shares directly through the DRIP, usually with low or no brokerage commissions. However, these costs are on the rise as corporations are charging more to continue to service their accounts.
Long-Term Perspective: The nature of investing in DRIPs nearly xe2x80x9cforcesxe2x80x9d individuals to purchase and hold stock, thereby adopting a long-term investment perspective through the regular purchase of shares over time to cumulate holdings in the designated corporation offering the plan.
Reinvestment of Dividends: DRIPs are a cost-effective method for investors to put cash dividends to better use by automatically reinvesting in additional shares rather than spending the money or holding it in a bank account. Reinvestment of dividends is also a non-taxable event under U.S. income tax rules with subsequent sale taxed at the corporate going rate while distribution of cost dividends creates a taxable incoming event.
Dollar Cost Averaging: DRIPs provide an excellent dollar-cost averaging investment strategy through regularly scheduled stock purchases over time. Rather than attempting to time purchases based on market conditions, often referred to as xe2x80x9ctradingxe2x80x9d. DRIPs allow investors to build wealth and accumulate investments with manageable and consistent stock purchases that can easily be debited from a bank account on a periodic basis. There are no brokerage firms that currently allow investors to set up automatic regular investing schedules to buy stock using a specific dollar amount on a specific time basis.
One disadvantage of the typical DRIP investment plan is that the DRIP enrollment process is slow, antiquated and often forces new investors to endure a six to seven week wait before initial trades are officially executed. Receiving DRIP enrollment and prospectus information through the mail can take up to three weeks and the completion and submittal of the information by investors can take another two weeks. Additional time is spent transferring initially purchased shares, typically through a transfer agent, from the investor""s brokerage account into the DRIP program. Finally, another one to two week wait can be expected before receiving a statement confirming the opening of a DRIP account and the assignment of an account number. With the increasing use of the Internet, this step has become easier. Several information providers have Internet sites where an investor can go to providing mailing and other information that the operators of those Internet sites will forward to multiple DRIP companies. While the investor would still have to deal with multiple sets of fees, rules and agreements, at least the investor can get all of that information online and even enroll online. They can even view their account statements online through some of these services.
Yet another disadvantage is that a majority of DRIPs require that investors purchase their initial shares of stock from a broker in order to gain eligibility to enroll in the plan. Initial shares in a DRIP must be registered in the individual investor""s name rather than the xe2x80x9cstreetxe2x80x9d or brokerage name, an often-confusing point for the first time DRIP investor. Brokers typically charge fees to register stock in the investor""s name and produce the stock certificate required as proof of ownership by the DRIPs.
Other disadvantages are:
Multiple Accounts: In the current DRIP environment, investors are required to maintain separate accounts for each DRIP in which they are enrolled, resulting in excessive paperwork and separate trade confirmations and account statements. Furthermore, each plan may have its own unique set of fees and commissions, resulting in a lack of price uniformity among multiple plans.
No Same Day Trades: Same day trades are currently not possible through DRIP plans. An investor cannot use a telephone or Internet-based service to place a buy order on the day they choose. In most plans, there is a specific day(s) per month when shares are purchased on behalf of investors, so investors may have to wait up to two weeks for the execution of DRIP purchases and sales leaving the investor to speculate regarding the actual trading price of the stock.
Cannot Maintain a Cash Balance: A DRIP is a direct ownership of stock. It is essentially a book-entry form of conventional certificate ownership. Therefore, there is nothing in place to provide for a DRIP to offer investors a place to maintain a money market or cash balance in their account. This disadvantage limits investors from making purchases of additional shares on the day or at the time they choose.
No Control over Buying Price: Although DRIP investors are focused on the long term, they naturally strive to achieve the best price. The sluggishness of the DRIP process severely limits the control with which investors can realistically purchase stocks. If, for instance, an investor wanted to purchase a few hundred dollars of a particular stock through a DRIP, they would have to mail in a check to the transfer agent, or plan administrator. The price on the day they mailed the check could be different than the price on the day the check was received and the new shares were purchased.
Cannot Determine Average Purchase Price: DRIP plans do not currently offer a feature to calculate the average purchase price of a stock after years of scheduled dollar cost averaging and dividend reinvestment cycles. Attempting to determine the average purchase price of scheduled trades and dividend reinvestments recorded in paper format can be extremely time consuming and frustrating, if not impossible due to misplaced records. DRIP investors currently have to purchase or use their own software to accomplish this task. This can be difficult, expensive and not necessarily accurate since it would require investors to manually enter their own transaction history into some type of a software program.
Must have a DRIP to Invest Directly: Another disadvantage is that a DRIP investor cannot invest in a DRIP plan in companies that do not offer DRIP plans. There are many companies that are good investment vehicles but do not pay dividends, choosing instead to use profits for research, expansion or acquisitions. Those non-dividend paying companies are not likely to set up DRIPS, so a DRIP investor would have to look elsewhere for investment. The ability to invest in a DRIP-like manner in companies that do not offer dividends and do not offer a DRIP is not available at this time. Yet another disadvantage of DRIPs is that is it difficult to hold those investments in tax-advantaged accounts, such as Individual Retirement Accounts (IRA""s).
Mutual funds overcome some of those disadvantages and are readily available to small investors. With a mutual fund, a fund manager maintains an account for each holder and the fund manager pools the funds of the holders. The mutual fund manager makes trades from time to time on behalf of the mutual fund and each holder benefits from a proportionate share of those investments. In nearly all mutual funds, the holders do not have input into the make-up of the mutual fund. If the holder is unsatisfied with the investment strategy of the mutual fund manager, the only choice for the holder is to withdraw the funds and move the funds to another mutual fund with a more agreeable investment strategy. Of course, very large investors could sway the opinion of a mutual fund manager if they owned a large percentage of shares. Mutual funds typically still have sizable barriers to entry for the small investor due to the large minimum investment generally required by most mutual funds. These costs can often exceed $2,000.
A DSPP works essentially the same as a DRIP, except that the initial investment can be handled through the DSPP, whereas a DRIP requires the investor to own usually at least one share of the company""s stock prior to enrollment. A DSPP or DRIP can also be set up by a closed-end fund. Such a DSPP/DRIP would work essentially the same way as a DSPP/DRIP of a publicly traded company.
Accounting for trades in securities accounts and mutual fund accounts differ in several respects. For most securities transactions, the transaction is done in a whole number of shares or a whole number of lots, where a lot is 100 shares. For mutual funds, a transaction is typically performed in a dollar amount (or other currency if dollars are not the currency in use). For example, an order for a securities trade might be for 200 shares of the ABC Company and an order for a mutual fund might be for $2,000 of the mutual fund. In both cases, the order has an associated price per share and a number of shares. Because of market fluctuations, the price per share is not often a round number. For the typical securities order, the number of shares is a round number but the total cost of the transaction is not a round number, whereas for the typical mutual fund order, the total cost is a round number but the number of shares is not. Whether some quantity is a round number or not is important for many holders because of the limitations placed on the trades by the brokerage or other operator of the computer system maintaining the holder""s account.
The invention enjoys numerous advantages over prior art DRIP or DSPP programs as well as online discounts and full service brokerages. In one embodiment of a trading server according to the present invention, these advantages include receiving stock orders from investors and combining or aggregating them according to type and issuer. At some later time, typically not in real-time, combined or aggregated trade is submitted to an exchange for execution as a single transaction in the name of the brokerage or broker-dealer and the results of that trade are used to fill the orders so aggregated. The trading server maintains accounts for each of the investors, allowing investors to set up one individual account to trade in many different issues of securities while having orders aggregated with other orders.
In specific embodiments, the transactions are preferably selected from buys and sells, but some embodiments may allow puts and calls as well. The orders, and possibly the trades, might be transmitted electronically over a dedicated data line or telephone line or might be transmitted over the Internet or wireless networks. The aggregated trade might only comprise one order, as might be the case for thinly traded securities, but preferably, many orders can be aggregated into a single trade. To make it more likely that multiple orders will be available for aggregation, the trading server can hold orders until many orders are received by the trading server before transmitting a trade for execution, even if orders are received in real-time.
In some embodiments, trades are submitted during specified times of day, next trading day, or end of the week, independent of when an order is actually received. For example, one embodiment of the trading server might defer execution or transmission of a trade to the exchange, even if orders are outstanding, until a certain time after the exchange opens, to allow the market to stabilize from the initial opening minutes or hour. Such an embodiment might also hold orders received between a cut-off time and the close of market until the next trading day, to avoid any closing instability. Some embodiments might also provide for a cut-off, such as half an hour, between the time a trade is transmitted and the time an order is received, to allow for orderly order aggregation and to allow investors to react more slowly to market movements and new events, as is recommended by many financial advisors but not followed by many investors. Orders can be received either in specified share amounts (such as for a""sale) or in specified dollar (or other currency) amounts (such as for a buy).
The trading server can be one computer or a collection of computers, preferably an arrangement that is connected to the Internet and is scalable to allow many hundreds of thousands or millions of orders to be taken from investors. In one specific trading computer system, a plurality of investor terminals, such as personal computers connected to the Internet and running HTTP browsers, are coupled to a trading server and the trading server is coupled to an electronic trading system to which trades are submitted and subsequently executed. That trading server comprises logic for accepting orders from the plurality of investor terminals, a database for storing accepted orders, logic for accumulating accepted orders in the database, logic for triggering a trading transaction, a means for transmitting a trading transaction to the electronic trading system where the trading transaction represents an accumulation of accepted orders of similar securities and logic for updating an investor account in response to the acceptance of orders and for updating an investor account in response to receipt of a trade confirmation from the electronic trading system.
In one aspect of a trading server, orders are aggregated and/or processed to lower the transaction costs of a trade or trades to accommodate those orders, often at the expense of trading speed, i.e., the orders are filled less expensively, although the order might not be filled as fast as other trading methods. While with long-term investing, such quick turn-arounds are less significant than for trading in days or shorter periods, all investors prefer timely execution of orders, which can be achieved with the novel system described herein.
Another aspect of the same embodiments of the invention is that due to the improved efficiency of trading system, either both lower initial investments per order or lower initial amounts to open an account may be achieved while maintaining an economically viable system. Thereby, both the cost per trade, amount of each order or trade, and total amount of the initial account is substantially reduced.